Brazil ETFs Poised For Breakthrough

July 01, 2019

What To Do?

Investors in Brazil and across the world appear hopeful that President Bolsonaro will push through key changes to the social security system in Latin America’s largest economy.

The stakes are high, because pension reform could boost the country’s flagging economy and give it some stability in the long run. Failure to enact the changes could stymie growth.

The chart below reveals Brazil’s positive momentum and technical improvement (testing support and breaking downtrends over the last few months)

 

EWZ ETF (MSCI Brazil 25/50 Index) Price Chart: The Last 5 Years

 

The odds of successful pension reform remain uncertain, but current multifactor analysis suggests Brazil is an attractive global equity allocation. As of May 31, Brazil (EWZ) ranks No. 2 out of 35 countries in Accuvest’s Global Core Equity – Country First Rankings.

Brazil is highlighted by strong growth fundamentals, positive momentum, decreasing risk and better than average valuations. Default risk in Brazil has dropped over the last 12 months (see chart below), allowing investors to refocus on the country’s high profitability, strong expected earnings growth and a very competitive currency. A breakthrough on pension reform and public finances would support Brazil’s constructive investment thesis.

 

Brazil 5-Year Credit Default Swap (CDS) Spread: The Last 5 Years (Lower = Less Default Risk)

 

Key Takeaways

  • After a decade of underperformance, Brazil appears poised for a rebound
  • Brazil is an attractive global portfolio allocation based upon balanced multifactor analysis
  • Key social security and pension reforms are progressing toward ratification
  • Financial markets and price momentum suggest optimism

Sources: MSCI, Thomson Reuters, CNBC, Bloomberg, Economist

For a list of all relevant disclosures, please click here.

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